MARKET MATTERS

Hearst Chief Investment Officer Roger Paschke Examines the State of Infrastructure in America

Published on 03.28.17

In this edition of Market Matters, Paschke discusses the problems associated with under investing in infrastructure and the impacts this can have on the U.S. economy.

How much of a concern is the infrastructure in the U.S.?

Roger Paschke: The American Society of Civil Engineers (ASCE) provides the most comprehensive assessment of America’s infrastructure through a "report card" issued every four years covering 16 major categories of infrastructure across the U.S. These include aviation, roads, bridges, railroads, transit, dams, levees, drinking water, inland waterways, wastewater, energy, hazardous waste, solid waste, ports, public parks and schools. The 2017 report was recently issued and has assigned an overall grade of D+ on America’s infrastructure—a shocking assessment of the underlying physical support structure in this country.

According to the report, the highest rated category is rail services, with a grade of B. However, 12 of the 16 infrastructure categories are rated D+ or worse. The estimate of total investments needed to address the major issues across all infrastructure categories—an enormous price tag of $4.6 trillion over the next 10 years—is greater than the entire annual U.S. federal budget. While about $2.5 trillion in funding has been identified, that leaves an infrastructure funding gap of over $2 trillion.

To illustrate the scale of the problem, consider just a few examples:

Nearly 40 percent of bridges in the U.S. are over 50 years old.

An estimated 240,000 water main breaks occur each year, wasting over 2 trillion gallons of drinking water.

More than half of the U.S. population lives within three miles of a hazardous waste site.

The total cost to consumers of congestion on U.S. highways was $160 billion in 2014—a 100 percent increase from 20 years prior—resulting in average delays of 42 hours per person each year. Additionally, one out of every five miles of highway in the U.S. is in poor condition.

24 percent of public school buildings are rated as in being fair or poor condition.

Since we interface with most of these infrastructure categories every day of our lives, the failing U.S. infrastructure creates major risks and safety issues for our families, homes, schools, water and food sources and work places. Most of us don’t even think about these issues each day, but there is hardly a more pressing financial need than addressing the massive under investment in this nation’s worn-down infrastructure.

In America, 24 percent of public school buildings are rated as being in fair or poor condition.

What is the infrastructure area of greatest importance?

Paschke: The greatest gap in infrastructure investment is with surface transportation (i.e. roads, bridges and transit), which is $1.1 trillion short of the amount necessary to fully address all the critical transportation needs across the country. Among the most immediate needs are the repair and replacement of bridges, over 56,000 of which were determined to be structurally deficient. Even more alarming, every day 188 million trips are taken across structurally deficit bridges in the U.S.

Beyond transportation, the failure of dams in the U.S. could imperil millions more people. The average age of the more than 90,000 U.S. dams is 56 years, with 17 percent classified as “high-hazard potential." As recently as February 2017, over 180,000 people were evacuated in the Oroville, California area over concern about a breech in the spillway for the Oroville Dam. An estimated $45 billion of funding is required to repair high-hazard potential dams.

Where would the money come from for these infrastructure investments and repairs?

Paschke: The most obvious—and likely the most accurate—answer is U.S. taxpayers. Most of the facilities within the infrastructure categories are publicly owned assets. Private contractors construct and repair roads, bridges, airports, waste treatment plants, public parks and schools. But typically, the federal, state or local governments or public agencies own the facilities and are ultimately responsible for their maintenance.

The estimate of total investments needed to address the major issues across all infrastructure categories—an enormous price tag of $4.6 trillion over the next 10 years—is greater than the entire annual U.S. federal budget.

States often issue bonds—in some cases supported by a federal allocation—to repair or replace a bridge, tunnel or airport runway. But the funding to pay off the bonds typically comes from user fees or tax revenues at the state, local or federal level. There are instances in which assets used by the public, such as toll roads have been built and owned by private entities or sold by local governments to a private company. Nevertheless, to the extent we make significant headway in addressing our $4.6 trillion of infrastructure needs, the lion’s share of the funding is likely to come from public sources in the form of increased taxes, assessments, fees or the sale of publicly owned assets.

Could U.S. corporations be expected to provide some of the infrastructure financing?

Paschke: There has long been public/private partnerships on various projects and initiatives determined to be “in the public interest." Private companies own the rail services, and it is not uncommon for private companies to operate toll roads, bridges, tunnels and even schools. The incentives for companies to become involved in public infrastructure projects include the collection of user fees charged to the people accessing the facilities and tax credits that may be offered by the federal or state governments.

However, these companies also understand the risks involved in such arrangements, meaning that they can’t just shut down or stop maintaining roads and bridges just because they run into a tough business climate. The fact that a private company has to keep committing resources to a facility regardless of how the economy or its core business is performing is a key reason why a number of these public/private partnerships or infrastructure initiatives have disappointed both the private investor as well as the public user over the years.

Ultimately, private companies are in business to make money, which they expect to do from any infrastructure project. In the end, if they don’t think they can turn a profit on a project over some reasonable period, private companies are not likely to be eager participants in a given public works project—regardless of how attractive tax incentives or user fees sound.

How many jobs are created from infrastructure investments?

Paschke: Based on data from the Bureau of Labor Statistics, currently about 15.5 million jobs in the U.S. (12 percent of the workforce) are related to infrastructure. Most analysis indicates that new investments in infrastructure create new jobs, the majority of which also have the advantage of paying wages comparable to middle class income levels. While there is disagreement over the number and longevity of the jobs created, a frequently used assumption is that $1 billion of new infrastructure investments creates around 20,000 new jobs.

A report from the Center on Globalization, Governance & Competitiveness at Duke University in 2014 estimated that increased federal spending on transportation of $100 billion annually over six years would create more than 2 million jobs. Boston Consulting Group (BCG) had a more modest estimate, suggesting that $1 trillion of new infrastructure spending (as proposed by the Trump Administration) over five years would create about 1.6 million new jobs, based on standard ratios of GDP to employment. However, the BCG report also suggested that a more “job centric” approach, prioritizing investments in infrastructure projects with the greatest job creation potential, could result in as many as 4 million new jobs.

One thing seems clear: Infrastructure spending handled wisely can provide a significant boost to the U.S. labor market.

The greatest gap in infrastructure investment is with surface transportation (i.e. roads, bridges and transit), which is $1.1 trillion short of the amount necessary to fully address all the critical transportation needs across the country.

How big a risk to the economy is the failing infrastructure?

Paschke: Deteriorating infrastructure erodes U.S. competitiveness globally and increases the expense for companies to operate efficiently, resulting in lost jobs and wasted resources. A prime example is the $380 billion funding gap for the U.S. schools system. Inadequate school facilities reduces the quality of education, which, over time, adversely impacts the ability for the working population to contribute to a strong, globally-competitive economy.

The 2016 ASCE Failure-to-Act Report estimates that under-investment in infrastructure will result in $3.9 trillion in losses to U.S. GDP by 2025—about 20 percent of total annual GDP in the U.S. Additionally, the report estimates that 2.5 million jobs will be lost and the typical household will lose $3,400 annually in disposable income—a big hit to most consumers. While few have suggested that the gap in infrastructure investments is likely to tip the U.S. economy into recession, it clearly leads to lost economic opportunities, fewer jobs and a threat to U.S. global competitiveness.

Cultural Economics

So, we have a pretty good idea of the risks and costs associated with inadequate infrastructure investments at the macro/national level. But what about for individuals? What’s the condition of your “Personal Infrastructure," as I would put it? Do you have sufficient resources to ensure that things like your house, health, finances, car, retirement, education, employment and family support are properly cared for? For example, it will cost a middle income family more than a quarter million dollars to raise a child born in 2015. Employer based health insurance for a family can easily exceed $20,000 a year—excluding out-of-pocket costs. To ensure adequate income in retirement, individuals should be saving around 10 percent of their income each year. The annual costs to own and operate a car is around $9,000. On top of all that, about one-third of your income will go toward housing.
Sobering statistics, indeed, but are we prepared for all this? The point is, if we are significantly under-investing in our personal infrastructure, whatever happens with infrastructure spending at the national level ultimately isn’t going to matter much to us.